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Headlines March 1, 2001
- Japan: 2M lines in 2001
- Globespan shipping 16 ports on a DSL chip
- 2001: US 3M, rest of world 8-10M
- Qwest's DLEC going live in DC
- Will ending reciprocal comp bring up internet
prices?
- Editorial: Don't hurt yourself by hurting consumers
- How telcos can get more respect
"The ConnectSouth team represent the finest group of people I have
had the pleasure of working with over the past 15 years." Jeff
Mucci, CEO, ConnectSouth, who unfortunately just had to make most of them
redundant. The industry continues to explode (2M lines coming in Japan),
but many face tough times. Make sure you've dealt honorably with workers,
partners, and customers.
"Cisco was blowing up in February" VC Roger McNamee, pointing
to a great company also struggling.
A short issue, instead of the extra long one that would have included an
intense analysis of SBC's move of the basic DSL price from $40 to $50, along
with the projection of fewer customers. I am holding it till next Tuesday,
for additional facts from SBC. No revelations, but I see the move as having
substantial implications for earnings and the competitive situation. Email
dave@ to add your opinion to the data. Meanwhile, to prove I'm
not a telco-basher, I'll be wearing a Bell Atlantic T-shirt Friday at the
Phoenix conference, and I'll switch to a Pac Bell tee if they can
find one for me. Dave Burstein
Best of luck to our friends at Agere/Lucent Micro
on their IPO, and we're looking forward to news from the DSL Forum meeting
in Vancouver.
Japan: 2M lines in 2001
NTT East: We plan to add one million DSL subscribers.
Tetsuo Koga, General Manager of Sales for NTT East predicts one million
DSL subscribers in eastern Japan alone. Add NTT West, eAccess, Tokyo Metallic,
and KDDI, and the Telechoice projection becomes reasonable, although it
is much higher than last quarter's predictions. This remarkable
change, was inspired by a government initiative promoting the development
of the fast internet and the opening of competition. Centillium has a remarkable
lead in the Japanese market after investing years in the development of
the Annex C standard that minimizes interference from the Japanese ISDN
network.
Globespan shipping 16 ports on a DSL chip
Leading the way to denser DSLAMs
Telco office colocation space is some of the expensive real estate
in the world, and the DSLAM chassis has a certain fixed cost, so one key
design factor is to squeeze as many ports as possible into the box. So there's
a mad rush to squeeze as much as possible onto one chip, and therefore on
to one line card, so everyone welcomes the move to the new generation..
DSLAM designers have told us lately that
we are, for the moment limited primarily by other components (from
splitters to controllers) and power are more severe limits. Fortunately,
Tripath/Alcatel and several others are close to market with low density
line drivers. We need to hear more from Globespan about power, size, and
cost, but they did specify the 16 port is shipping and available now. db
2001: US 3M, rest of world 8-10M
Company estimates, however, were high for 2000
Company estimates put US subscribers in 2001 about 3M, with both
Verizon and SBC geared up to do 200-300,000 per quarter, BellSouth planning
400,000, and Qwest 250,000. Internationally, we report above Japan's planned
2M, Germany (DT) plans a million, and enough equipment has been ordered
by Telfonica to do a million subscribers between Spain and Brazil. France
Telecom, Telia, Telenor and KPN are deploying rapidly, with BT and Telecom
Italia making grand plans. Korea did 2M in 2000, which will be hard to match
in 2001, while Taiwan's equipment purchases suggest volume there as well.
Telcos in 2000 missed their goals by 20% and more,
so none of these numbers (or more detailed ones from analysts) are guaranteed.
But the growth remains impressive, and the shift away from the US dramatic.
db
Qwest's DLEC going live in DC
$3B revenue plan for 2003
Augie Cruccioti has his work cut out, if he's going to meet Joe Nacchio's
ambitious goals, but Qwest has met some tough targets in the past. They
outlined their plans last summer, to leverage existing OSS and customer
support to expand out of district. They are not interested in the residential
market, targeting instead businesses and telecommuters. California
and Texas were the first stage, and now they've come East. Qwest and MCI
have an excellent business case to purchase NorthPoint or another DLEC.
Will ending reciprocal comp bring up internet
prices?
Nearly done recip deal shifts costs to the
net
Nearly $2B per year goes from the four telcos to competitors, largely
as compensation for completing calls to Internet service providers. The
system was set up when the telcos thought they would be collecting, not
paying the fees, at prices so high the system is clearly irrational. Billy
Tauzin, who achieved the chairmanship of the House Commerce Committee with
the over $10M support of the telcos, has an active bill looking to end the
system. Consumer advocates claimed this would raise internet prices, a suggestion
we discounted a few months ago, feeling competition would keep internet
prices headed down. Telcos also said it would make no difference.
I apparently was wrong. Recip is a key cost factor,
but I believed competition would hold down the price. Recent DSL price moves
are evidence the expected repeal is making a larger difference than we expected.
Editorial: Don't hurt yourself by hurting consumers
Covad shut down thousands of consumers while trying to collect from
ISPs, and will pay a disproportionate price for that move. Every prospective
Covad customer will now have to ask "Will I lose my connection one
day through no fault of my own?" You can't measure the cost of that
doubt, (or a telco's loss of reputation because of inferior service), but
it is surely far greater than the money collected. We don't know whether
Covad and ISP was right in the legal case, but we are certain Covad made
the wrong decision. The customer is (almost always) right - good will has
enormous value.
How telcos can get more respect
Being more open with reporters brings the best
pr
A telco veteran and I have been trying to understand why so much
of the press coverage of Verizon and SBC is negative. Crucial, I believe,
is that telcos are so guarded with information that the only time a reporter
has any news is when they foul up so badly the story can't help getting
out. We know, for example, that SBC has one of the two or three most advanced
consumer VoDSL trials in the world. We also were convinced, off-the-record,
that Verizon is working darn hard to play by the rules of competition in
New York State. If the companies were more open, we'd have been able to
write those stories. Instead, they rarely discuss anything that hasn't
been approved at three levels or in a press release. Telcos have far more
power, and need careful watching, but anyone smart in this business knows
the telcos are no better and no worse than anyone else. Result of the too-careful
information policy: the company approved stories are rarely newsworthy,
and writing anything else requires investigative skills worthy of a cold
war Kremlin watcher.
Briefs:
- The JDS 3,000 person layoff proved that no one, not even the hottest
of optical companies, is immune from the industrywide problems.
Chips:
- Virata's new Helium 200/210 targets gateways and home voice systems
with double ARM cores and integrated ethernet. Their very helpful press
release included 23 statements from customers and analysts, including
Samsung's comment "Only Virata is able to provide us with the most
integrated and cost-effective technology available on the market, along
with excellent engineering service and support." Samsung itself
has an interesting chip in this space that is make inroads with a very
price.
- TI has a new network processor, with a MIPS core, which Terry Riley
told us is delivering excellent performance. We'll have an article in
a few weeks, "The smart part of the modem: competition for Virata
from TI, Motorola, ishoni, VoicePump and especially Samsung"
Stock Market:
- The Wall Street Journal pointed out that US bonds went up 21% in 2000,
and the NASDAQ down 39%.
- 98% less money is going into tech stock funds - $100M in January 2001
compared to $9.5B in January 2000, per Lipper in the Merc. But with
prices down, this may prove the wisest time to invest - recent buyers
of Efficient nearly doubled their money, and there have been opportunites
to do even better in many now low-priced DSL stocks. For VCs and private
investors, the opportunities are even bigger - some remarkably attractive
deals haven't found financing.
Headlines Feb 22, 2001
- Alcatel's
own Voice over DSL
- What
the heck is going on at Covad?
- NorthPoint
for sale
- Nortel
cutbacks - we got the story right by accident
- What
Wall Street knows about telecom equipment
- Covad:
making line-sharing work
- Copper
Mountain's cash gives them time
- TdSoft
$20M, Arrival $17M, MegaPath $10M
- ConnectSouth:
another one bites the dust
- New
Edge: we're cutting back
- Siemens
takes Efficient for $1.5B
- Briefs:
future demand, forecasts of bandwidth demand, Verizon, Motorola, Citynet's
fiber in the sewer, NHC,BellSouth, BroadJump, Alcatel/RC Networks, Virtual
Access, DVTel/Infineon, TI price dropping, LSI Logic, Tripath, Legerity,
Analog Devices, "There is no consumer choice for DSL in the UK",
KPNQwest, highspeed wireless. Maida Chicon, Harold Furchgott-Roth, Kelvin
Ko, Netopia/Proxim, Lucent, rapidly falling DSL chip prices
"It just keeps getting uglier and uglier,"
Ken Hoexter of Merrill Lynch on Covad's problems (WSJ)
Sorry for the delay between issues. We've been working hard, including
over 40 interviews trying to understand why SBC, a very smart company,
chose to raise DSL prices 25%+ when chip and equipment costs are plummeting.
Tuesday issues for SBC and also Centillium's look at Japan's 2M lines
in 2001. Meanwhile GTE's fast DSL connection on Kauai, 100 yards from
the beach of your dreams, brought us the news Wiley will publish
DSL, A Wiley Tech brief by Jennie Bourne and Dave Burstein in
September. But see us sooner - come to the VoDSL conference
in New York (ad below). I'm chairing it and will keep it lively. db
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Alcatel's own Voice over DSL
Gateway on a 7300 DSLAM
card
With a little help from friend TDSoft, Alcatel later this year
will deliver a voice over DSL gateway. according to an presentation at
a European conference. First targeted at Europe, the goal is to deliver
distributed VoDSL right in the telco CO, feeding a local switch. (In the
US, Alcatel will continue to work with CopperCom for now, and is in advanced
trials at telcos.) Alcatel last year was considering buying a gateway
vendor (CopperCom or Jetstream) but the price was too high, so they chose
to develop their own product.
The 7300 is a watershed for the industry, a true "next-generation
DSLAM" now becoming the standard unit in the major telcos, where
Alcatel has two thirds of the world market. A video grade unit with gigabits
of backplane speed, processors and control systems capable of IP quality
of service and multicasting, optional test capabilities, and interfaces
soon to reach OC-12 and beyond.
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What the heck is going on at
Covad?
"We are in no
danger of Chapter 11 at all" Covad's Sessums
Chuck McMinn and team built an exciting company, but this second
financial crisis implies a tough road ahead. Covad's writing off at least
another $50M - and probably much more - when they finish closing their
books this quarter. Part of the writeoff is an accounting rule (if a modem
is provided as part of a three year contract, the modem income has to
be spread over three years.) Another part is Marketing funds advanced
to ISPs that have not paid off, and a large part is additional ISP debt,
most of which we thought had been dealt with months ago. They are closing
300 of 1900 COs, extending layoffs, and returning trucks to the lessor.
They are essentially writing off much of the Bluestar deal. A few
days earlier, Covad played hardball with ISPs, shutting off thousand of
customers of Internet Express and DSL Networks, creating permanent fear
among customers, terrible pr, and convincing us, before the financial
announcement, that the problems were much worse than reported. If Bob
Knowling hadn't pushed through the last $500M financing just before he
left, the situation would be dire; with the cash on hand, Covad has many
months to turn things around, and we hope they do. Fortunately, AT&T,
XO, SBC, and others able to pay their bills are bringing in most of the
new customers, and Covad reached a businesslike settlement with Flashcom
in court. Below, some Covad good news (linesharing is working, and customer
self-installs are increasing), and next issues we have an interview with
ex-CEO Bob Knowling. (Sorry, no revelations - he continues to like and
respect the people he worked with at Covad.)
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NorthPoint for sale
Bids coming in for
late March
Verizon suit advancing
There are many rumors - but little solid information - about the
bidders for NorthPoint, in a process leading up to a court date in late
March, the hoped for (but not guaranteed) final resolution. One probably
out of the running is NTT/Verio, which is pulling away from DSL. (Will
NTT have to take a write-off on their $5.5B purchase of Verio, now clearly
worth less than half that?)
Meanwhile, they've won a ruling their $B plus
law suit against Verizon can proceed in California, and recent events
have only improved their case. NorthPoint should win the suit if the "material
adverse events" were caused by "facts, events, changes or effects
that are generally applicable to (A) the data industry, (B) the United
States economy or (C) the United States securities markets generally or
the Nasdaq Technology Index in particular". Clearly, problems in
the data industry played a major role. Lucent, Cisco, and Nortel have
also suffered shortfalls that NorthPoint's lawyers will attribute to "problems
in the data industry" - an argument whose merits may well remain
unclear until years from now in a jury trial. Meanwhile, we're watching
Verizon's financial statements. They presumably will have a lawyer's opinion
that minimizes their material risk, but the lawyers we've consulted are
not sure at all, and a reserve (or a settlement) would be prudent.
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Nortel cutbacks - we got the
story right by accident
"CLEC strategy"
failed, as Nortel's layoffs demonstrate
We were just referring to DSLAM future sales, but several misread
our comment suggesting deeper Nortel trouble, which we were not predicting.
We have enough trouble tracking DSL. Turns out, the same reasoning applied
to the larger company as well, but we hadn't predicted it.
John Roth of Nortel is a smart and honest man, who
has earned the industry's respect. We believed him when he told
five hundred wall streeters that Nortel would have an exceptional 2001,
growing 30%. Last Thursday, he had to accept that he was wrong, and laid
off 10,000 employees. The fall speech itself contained enough to anticipate
the problems, as we now see in hindsight. He emphasized sales to CLECs,
but told us Nortel would no longer finance them. Since CLECs worldwide
are short of capital, he was being unrealistic expecting major growth.
Apparently also unrealistic were his growth goals for optical networking,
the one area the bubble hadn't burst in. Nortel is the last of the telecom
giants to accept the problems, which originate in the capital expense
cutbacks at telcos around the world.
Corporate problems, unfortunately, overshadow
the remarkable fourth quarter of 2000, and Nortel has now shipped over
600,000 lines of the Promatory DSLAM. Korea Telecom has become a major
customer, and they are also shipping to @Link, First Mark, and PLDT in
the Philipines. Tokyo Metallic gives them an enormous upside in Japan.
Brett Sheppard believes they had 10% of the world market last quarter,
and will hold or increase that percentage this year.
What Wall Street knows about
telecom equipment
For the last six months, Wall Street has seen projections from
telco after telco that capital spending will be relatively flat or down
for 2001 and 2002. Qwest, Verizon, SBC (and of course all the competitors)
geared up for data and wireless, and are unwilling to up the rate of investment.
The result, of course, is equipment sales, especially in the US, also
cannot rise rapidly. While individual companies may buck the trend, it
was impossible for most major companies to increase sales 20-30%, as many
hoped. One by one, sales projections have come down, from Lucent, Cisco,
ADC, and now Nortel. Most were inevitable - you can't sell what they won't
buy.
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Covad: making line-sharing work
In nearly 100% of 1600
surviving offices
Linesharing cuts monthly line costs from $10-20 to about $3, and
is absolutely essential if there is ever to be any competition for consumer
DSL. The FCC ordered it for last June, and after delays it is working
well in much of the country, with lines delivered to competitors in less
than 5 days in many cases. Because it uses existing lines the problem
rate is as much as 70% lower, dramatically driving down the operational
cost.
Covad hoped to be this far along in December, but some
areas dragged to February. As they train ISPs and restructure agreements,
they are also moving to standard customer install for nearly all consumer
sales this spring. These kinds of day-to-day improvements mean the industry's
longterm future is bright - despite the painful stories we have to report.
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Copper Mountain's cash gives
them time
Revenues shrink dramatically,
and future unpredictable
When times got bad for the industry, a common comment was "The
good companies will do fine." This was clearly mistaken. Copper Mountain
has delivered some of the most reliable DSLAMs in the world, and given
customers (and reporters) excellent support. They've been fiscally prudent,
and earned a profit. Their partner program was so successful, the
rest of the industry copied it.
3Com just sold several million dollars worth of Copper Mountain
DSLAMs in an OEM deal, and mPower expanded their purchasing. But the problems
of customers like Rhythms, NorthPoint, and JATO cost them much of the
quarter's revenue, which McLeod and basement DSLAM orders couldn't compensate
for. NorthPoint was acknowledged as the source of the $8M write-off, and
inventory/work-in-progress in the tens of millions must be written off.
They now need to build international sales, where the market is growing
twice as fast as in the US. Paradyne, facing similar problems, has already
cut back staff and spending, and is emphasizing international sales -
Copper Mountain's conservative financing will give them breathing room
to do likewise, and bring a nextgen unit to market.
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TdSoft $20M, Arrival $17M, MegaPath
$10M
There's still money
out there
TdSoft is the early leader in delivering European 5.2 VoDSL, with
enormous potential and a deal with Alcatel. Because Alcatel ships more
than half the DSLAMs in the world, that deal is transforming the VoDSL
market. Founder and CTO Eytan Radian now is building the company in the
US - he's one of the most colorful characters in the industry.
Arrival is building a network in California, emphasizing business connections
in the areas not well served by Pac Bell. Many feel the industry survivors
will be led by companies like Arrival, @Link, New Edge, and IP Communications,
if they emerge as the strongest active competitors to the telcos in selected
COs.
MegaPath is a business-oriented ISP, where Harry Taxin has emphasized
high-quality service from the first, and MegaPath ratings on DSL Reports
have always been high.
ConnectSouth: another one bites
the dust
Staff gone, operations
expected to close
"Another one bites the dust" is our headline, to make
the point that industry problems are overwhelming many companies with
decent management and hard-working staff. We know the pain of the people
whose dreams were denied is very real; some will lose their homes and
health insurance. Good companies , not just weak ones, fail in this market,
and everyone looks for a scapegoat. But Bob Knowling of Covad, for example,
was not a brilliant manager in April and a rube in October. Rather, he
was a smart man brought down by industry changes. He's happy to talk,
with hindsight, about mistakes he made - but we've yet to meet anyone
perfect.
Morgan Stanley funded CLECs in different regions, hoping to duplicate
the remarkable early success of Rhythms, Covad, NorthPoint and DSL.net.
eAccess in Japan is now growing rapidly, and we hope proves a prudent
investment. But nearly a half dozen groups had a similar idea in the US
south and southwest, and the result is that all are in trouble. Before
the general CLEC collapse, Bluestar's IPO failed and their VCs were temporarily
bailed out by Covad (another portfolio company.) Vectris and Darwin followed,
and now ConnectSouth, when the next round of funding fell through.
New Edge: we're cutting back
55 jobs lost
Dan Moffat's company is pegged as one of the survivors, but that
means he has to make tough decisions along the way. With no more capital
in sight, he had to drop 55 more workers (second layoff) as well as temporarily
shut down some locations in Florida and Georgia, reducing COs to 500.
He's also had to turn down very attractive offers to take over others,
including Vitts and ConnectSouth; a very smart banker should find a way
to provide him the funding to take advantage of opportunities like that.
In the works is an editorial "Seven realistic
steps to increase competition, bring down prices and move toward universal
service" One of them will be to bring the price of fiber backbone
connections down in rural areas, the main reason Covad, New Edge, and
others are shutting down small offices. The marginal cost of a fiber-optic
lambda is dramatically less than the fees charged; if there is no competition,
then creative unbundling or regulation should be used to reduce monopoly-like
prices. Congressmen Tauzin, can you deliver that to your small town constituents?
Siemens takes Efficient for
$1.5B
Also investing 100M
for new DSLAM plant
Mark Floyd gave us the good news "We plan no layoffs, and
I as President of Siemens ICN Access solutions expect to continue to lead
and grow the company. " Besides a major SBC contract, he's expanding
in China and Barzil, where Siemens international experience will help.
Floyd added "Urban China is apartment buildings, allowing rapid growth
as we've seen in Korea. Telefonica in Brazil l looks to become a major
customer." With Deutsche Telecom aiming at millions of DSL lines,
Siemens is preparing to serve - and grow worldwide. Efficient is the leader
in modems, and their Flowpoint division was critical in early tests of
voice over DSL. The bid is 70% above recent trading, but only a small
fraction of last year's value.
Briefs:
- Where
will the future demand come from? The mantra remains "we
have more orders than we can handle", and the installation delays
would seem to confirm that. SBC, Verizon and most CLECs still take over
a month for most installs, compared to a telco (and cable industry)
standard of 3 days, suggesting a backlog. But we believe that overall
installation capacity has caught up with demand, with SBC, as we will
report next issue, with the capacity to handle 500,000 more orders than
they desire in 2001. Similarly, looking closely at order backlogs at
CLECs Covad and Rhythms, install backlogs are stable to down. The easy
early adapters have been reached in the major cities; we're now in the
"post-DSLAM" era, needing DLCs and loop extension to expand
the market, and service quality that will inspire customers to want
DSL.
- Andrew
Odlyzko of AT&T has convinced us we were wrong in our forecasts
of bandwidth demand, a key determinant of the equipment you need
to purchase today. He's found substantial data that suggest the widely
quoted "doubling every 120 days" growth of the internet is
overstated by half or more. That's what we've been hearing reflected
in network demand within DSL as well. Even doubling over a year will
make typical DSLAMs installed in 2000 obsolete in 4-5 years, but that's
better than the 2-3 years we have been projecting. Odlyzko is speaking
at the IGI conference Fiber Bandwidth Glut: Fact or Fiction April 18-19,
2001 in Boston
- 540,000
DSL customers was the first highlight of Verizon quarterly financials,
30% below their spring goal but ahead of the 500K they expected in the
fall.
- Motorola
is splitting its broadband division (the old General Instrument) into
two parts, entertainment and networking. Their Streamaster set top is
already in use in the Enron/Verizon trials, and they intend to offer
DSL versions of the gateways and intelligent home controllers they are
selling to cable
- Fiber
in the sewer, anyone? Citynet's robots are now at work in Albuquerque,
deploying cable.
Deals:
- NHC
won a large order for equipment from BellSouth. Like most
telco deals, this was a long time in the works, but the potential volume
is significant. With 5 North American telcos representing about 80%
of the market for DSL equipment, each decision is crucial.
- BroadJump
signed SBC, and is close to dominating the market for broadband installation
software, with several cable providers on board as well.
- Alcatel
will OEM basement DSLAM equipment from RC Networks, which has
produced equipment that works well in the field and is priced far below
the market. They have $3,000 units that make ideal building starters,
while the more exciting products, just coming to market, include voice.
- Virtual
Access has won orders from BT and BellSouth for routers, and is
optimistic in other telcos. A simple to use test mode, with a graphical
user interface, helps end-users and providers determine where the problem
is - local machine, local connection, DSLAM, etc. Pete Castleton of
Verizon told us last month that the ability to test is proving critical
to network reliability, and is a key factor in their equipment decisions.
Products:
- DVTel
announced a new Video over DSL system, using chips from Infineon.
Chips:
- TI
has been especially aggressive in pricing, competitors claim, but while
DSL is strategic to them, the dollar volume is probably not material
to their earnings. DSLAM manufacturers (except Alcatel and Siemens)
have all dropped their forecasts for 2001 - that's lower growth, not
an absolute downturn.
- LSI
Logic introduced an 8 port analog front end chip, with good numbers
for noise and power.
- Tripath
cut a deal for Alcatel's support of their low-powered line driver, one
of the first of a new generation that will raise DSLAM port density.
- Legerity
(the AMD spinoff) "opened the kimono" at ISSSC with technical
details on their high voltage chips that eliminate splitters and combine
voice and data.
- Analog
Devices, on the other hand, is working to eliminate the line driver
entirely, combining it with the analog front end.
International
- "There
is no consumer choice for DSL in the UK", Kingston said as they
deferred their service till at least next year, blaming BT.
All the CLECs are looking at business. CLEC Thus, even with the backing
of Scottish Power, has had to abandon DSL plans.
- KPNQwest's
Jerry Yohananov emailed that DSL "is not a big part of our future
strategy". They've cut back from 1600 to 300 planned COs.
Competition:
- Half
the companies at Cannes 3GSM conference will be out of business in a
year, predicted VC Olav Ostin. Highspeed wireless handsets and
customers will be very rare until much later than predicted.
People:
- Maida
Chicon now directs Verizon's multicultural marketing organization,
the kind of outreach lesser firms will need to develop as the surge
of "early enthusiasm" passes.
- Harold
Furchgott-Roth, the FCC commissioner without a television set, has
resigned, because "every free-market advocate in government must
fulfill his dream of returning to the private sector." Bush now
gets to name his replacement, as well as Bill Kennard's.
- Kelvin
Ko is the new Asia director for Videotele.com, the Tektronix video
server spinoff, which has promised dramatic breakthrus in price/performance
for video headends. DSL is barely visible in China, but Videotele's
three offices presumably are calling on many prospects. Video growth
is slower than expected, because the big telcos are scared of the investment
required, after massive losses six years ago. But as costs keep coming
down, (and DSL Internet traffic pays much of the infrastructure cost),
the economic argument keeps getting better. We think the time is now,
although many disagree; we are certain the economics will become overwhelming
within a few years, which means every DSLAM or DLC purchased today without
sufficient growth capability will prove a mistake over time. There's
less than a 7% difference in cost between video-capable DSLAMs and obsolete
ones; in the case of the Alcatel 7300, the new model is cheaper, per
port, than the old one, but has 10 times the potential capacity.
Stock Market:
- Netopia's
takeover by Proxim illustrated the downside of having cash -
cash makes you very attractive to a buyer offering stock. But "fully
funded until breakeven" is the mantra of today's successful net
company. That's one reason Wall Street is abandoning Amazon; their cash
runs out late this year, with no profit in sight.
- Lucent's
downgrade to near junk bond status is a frightening reminder of how
fragile the Internet and telecom boom really was. The DSL division continues
to do well, with growth expected in 2001. The SEC investigation is surprising,
but is another warning audited statements are not always accurate, especially
as things change. Management hoped that DSL, like optical, would be
spared layoffs, but the corporate problems are now so severe nothing
can be guaranteed.
- Several
analysts asked us about the impact of rapidly falling DSL chip prices
on stock prices, which we are reluctant to forecast. Virata seems the
least effected, as they emphasize features beyond the standard, but
no one else is likely to be immune from an earnings hit, especially
in Q2. (Since many chips are sold under contract, spot prices don't
always have an immediate effect.) But ADI, Aware, and others have already
seen severe stock drops, so don't read this as a sell recommendation,
please. (In fact, since we wrote this several DSL chip companies have
seen their stock rise.)
In the works:
- Japan:
2M lines in 2001
- Sprint's
2000 COs could make them the largest DLEC; Lucent Stingers in 1200 offices,
but only 60,000 customers before 2002
- Telcordia's
software delays and Project Pronto
- Elastic
Networks - a different technology, a longer reach
- Catena
- price breakthrough to add DSL to older DLCs
- CWA's
remarkable challenge to telco data accuracy
- CISPA
attacks SBC on content control
- What's
up with Project Pronto and software delays
- Broadband
Bill of Rights and a genuine consumer movement
- VoDSL
articles from AFC, Aware, and Copper Mountain.
Headlines Jan 17, 2001
- NorthPoint will emerge - with new owners
- DSL Yearend US ~ 2.4M, Korea 2M
- Rhythms cuts 450+
- $300M U.S. Government DSL contract
- Winfire - Systems good enough to sell
- Actelis: too fast to be true?
- Briefs: Nortel, T1E1.4, Qwest, 2Wire,Netopia, General
Bandwidth, Broadcom, Japan fiber, Mark Emery, Doug Broad, Jef Raskin,
Genuity
"Sony will become a personal broadband network company
by developing gateways. The era of stand-alone TV products is over"
Noboyuki Idei, Sony Chairman and the inspiration for Japan's
new telecom rules.
Liz Fetter promises a "structured sale" of NorthPoint, bringing
new owners and possible disappearance into a larger company. They ran out
of money because the market turned against them, and they chose a faithless
partner, Verizon. NorthPoint built a network that covers nearly half the
US in two years, delivering to 100,000 customers DSL, a technology that
was still in the labs when the company began. Customers will be well treated,
with service continuing without disruption.
What's next for NorthPoint
Buying time, not going out of business
"The purpose of our filing is to use the breathing
room Chapter 11 provides to sign an agreement with a financially sound
strategic partner who is interested in our world-class network, our skilled
and dedicated employees and our attractive customer base." (Fetter)
Last week, Goldman Sachs denied NorthPoint access to $160M of credit, which
required meeting certain financial targets. NorthPoint, like all CLECs,
will need cash for at least two more years, as they build a customer base.
The best investment bankers in the country thought the plans prudent, and
nearly every Wall Street analyst called them a buy last year when the stock
was worth $Billions. But the market turned away, and so did the bankers
and financing. They sold control of the company to Verizon for $1.3B, including
enough cash to carry them to profitabilility, but Verizon backed out of
the deal. Now, $38M in debtor in possession financing will let them meet
the next few months' payrolls.
Bidders will help them emerge
If Verizon valued the company at $2.6B five months
ago, what is it worth now? NorthPoint has 1700 COs across the United States,
with a complete operations team and system, as well as 100,000 customers
and strategic relations with Microsoft and other ISPs. Qwest plans to build
a $3B CLEC, and Nacchio told us they have been looking closely at all three
DLECs, just waiting for the right price. MCI also needs facilities across
the nation, and almost bought Rhythms last spring. NTT invested $5B for
Verio, and a fraction of that would give them a national DLEC to serve those
customers, while DT, FT, and Telefonica all are expanding in the US. AT&T
presumably won't make a move till it resolves with AOL whether they will
share a cable monopoly, but if they don't, AT&T needs the facilities.
Sprint has installed as many as 800 DSLAMs already on their own, so probably
isn't looking to buy. Verizon, if they don't quickly win the court case,
may have the most incentive of all. Surprises could be CLECs like Allegiance
or Focal (who share investors), XO, or a dozen others, if the price is right.
$400M of bonds pushed sale to bankruptcy
court
Yesterday an investor who bought NorthPoint's stock
(total, less than $200M) would also be responsible for $400M of 12 7/8 percent
Senior Notes sold February in a private placement. Now, a buyer in the bankruptcy
court auction could potentially avoid paying several hundred million dollars
by partially paying off the bonds. A similar debt load is why MCI did not
buy Rhythms last spring.
Likely losers
- Stockholders, and employees with options, will get
little or nothing unless the bondholders and other debtors are paid
in full.
- Goldman Sachs Credit Partners, CIT/NewCourt, CIBC,
Credit Suisse and a syndicate have apparently provided $140M of financing,
payment of which depends on the offers in bankruptcy court.
- Copper Mountain has reserved $8M and Netopia $1M in
case they are not paid by NorthPoint. All ordinary creditors, including
the landlord, are not guaranteed payment.
Mike Malaga had a vision
Mike Malaga, Pete Castleton, and Jeff Waldhuter inspired
this newsletter, convincing us that the fast internet would change everything,
and that they could deliver it over ordinary copper wires. (Some articles
we've written may have left them with regrets.) He worked tirelessly, once
offering to get up at 4:30 a.m. to be on our radio show. For years, progress
was slow, because neither the equipment nor the financing was ready. By
1999, the race was on, the IPO money poured in, and by that fall the network
build was ahead of schedule. There was a decency about how employees and
customers were treated; even folks laid off wished the company well. When
the hard times hit, Liz and crew were open and honorable. Nearly all the
customers of failing ISPs have been supported without problems, while others
continues to struggle.
Verizon still faces $1B lawsuit
Verizon signed a contract in August to buy 55% of
NorthPoint for $1.3B, but only paid $200M before it declared NorthPoint
in default. Verizon's backing out clearly cost NorthPoint the better part
of $1B, which suggests the possible damages if NorthPoint wins. We've analyzed
the contract at length, and spoken with the lawyers on both sides. Neither
we nor the attorneys we've asked to review it are willing to pick a winner.
Verizon has not set aside any reserves, but the potential damages are so
great that if they don't get a quick ruling, they have powerful incentive
to settle. The lawsuit is one of the key assets of the company going forward,
and will be aggressively mounted.
The leaders still did well
Mike Malaga may not have made hundreds of millions,
but he sold nearly $5M of stock in August and $3M in February. Liz Fetter
cashed over $M, Mory Ejabat nearly $2M, and Steve Gorosh $3M. Reed Hundt
also sold NorthPoint shares worth $600K, or more than he made in several
years as Commissioner of the FCC. Others in the industry cashed even more
this year: Rhythms' Hapka $20M, Redbacks' Barsema $140M, Globespan's Geday
almost $10M, Efficient's Floyd $33M, Covad's Knowling $20M.
DSL Yearend US 2.4M, Korea 2M
Numbers coming in
SBC in particular has not released a firm number,
and several have just given guidance. So expect a few revisions in the next
two weeks, but this number is close enough to be useful.
SBC - 880K?
Verizon 540K
Covad 274K
Qwest 250K +
BellSouth 200K +
NorthPoint 100K +
Rhythms 67K
Broadwing 40K ?
Others including NAS, DSL.net, New Edge (6K), Vitts, New South, IP, @Link
less than 50K,
Korea Telecom has the most subscribers in the world, over a million, and
Hanaro is the second or third largest, a remarkable achievement, according
to the Korean Ministry of Information and Communication. DT in Germany is
the leader in Europe, and we welcome anyone who can point us to more worldwide
numbers.
Winfire - Systems good enough to sell
Eric Geis, Firetap the first customer,
as "FreeDSL" passes 40K subs
Chad and Ryan Steelberg built a network and OSS designed
to support video grade service, and are now serving 40,000 "FreeDSL"
subscribers, the majority of whom pay $19 or more per month for a higher
tier of service. They've always intended to make money with variable speed
offerings and added value services, including video, and a hard-working
team designed a sophisticated network control system. They can shape traffic
to each client, allowing higher speeds, for example, when an advertiser
is paying to stream a video commercial. Chad tells us the result is a system
whose design is robust enough to resell. So they've established Octive as
a separate division. Eric Geis' Firetap, controlled by Homestore/Realtor.com,
and with close relations with the National Association of Realtors, is the
first customer. Geis was a VP and one of the first at Rhythms, so his endorsement
is a strong one.
Everyone's skeptical about Winfire, especially as other
DSL providers are struggling for cash flow. Steelberg's attorneys,
Rus, Miliband & Smith, have sued them, per the Orange County Register.
But they're delivering lines by the thousand, and we've heard nothing that
suggests the network they are building will not live up to their ambitious
specifications. Financial details are mostly confidential, with speculation,
but they have to be admired for accomplishments.
Rhythms - 450+ laid off
Protecting the cash as subscribers
pass 67,000
They raised $1B in 2000, giving them the cash to continue
through 2001 and well into 2002 after these cutbacks. 4,000 of the quarter's
20,000 new customers were line-shared, lowering costs, and a major expense
- market development funds to attract customers - has been eliminated. Yearend
2001 target is 175,000 lines, while capital expense in 2001 will drop to
$75M. They will cut to 40 markets, although details on how this will be
done are still to come.
Winfire gives Rhythms extraordinary
quality ratings
Chad Steelberg told us they are having remarkably
good results with the lines they are installing through Rhythms. To enable
the video and other profitable services, they constantly test line speeds,
and found the lines faster and more reliable than the telcos. In addition,
where speeds weren't holding up, Rhythms quickly upgraded to solve the problem.
We previously reported Rhythms designed to a higher level than others,
including a very low 4-1 oversubscription ratio for business lines. Winfire's
monitored lines confirm they are delivering as promised.
Actelis: too fast to be true?
"copper performance to fiber-quality
speed and reliability"
Actelis claims they "radically boost the speed,
range, and reliability of copper to achieve fiber performance and quality
in the local loop." That seems so unlikely that we have chosen not
to report about them previously. They have given neither concrete facts
nor performed demonstrations. We include them now only because some serious
people are signing on, including Marty Kaplan, chairman of JDS Uniphase
as a director; Paul Fagan of Fujitsu as VP sales; and Ben Hsu of Next Level
as VP operations. Gallagher's doing the pr (they played a critical early
role for Redback, Copper Mountain, Tollbridge, and Zhone) and investors
include New Enterprise Associates, U.S. Venture Partners, and Walden International.
Several companies (Voyan, Bandspeed, Paradyne) have publicly or privately
demonstrated increased performance/reach, and every chipmaker is working
on improvements in noise reduction, echo cancellation, and other signal
processing. But these efforts are targeting 20-30% better results, not the
order of magnitude suggested by Actelis.
$300M U.S. Government DSL contract
GSA deal covers the military as well
GSA Federal Technology Service Solutions in Oakland
led the contract negotiations, along with the Boston office, in a contract
Paula Shaki Trimble in Federal Computer Week believes could go as high as
$300M over five years. Agencies will be able to order through a portal,
from vendors to include: CAIS, Computer Support Associates, Comtech, Focal,
GAITS, Integrated Technologies, Net Connection, Netifice, Network Access
Solutions and Omega Consulting.
Incoming:
- Brett Sheppard of Nortel just sent an email
that we were wrong when we wrote "Nortel has no way to meet sales
goals through CLECs", and we questioned Nortel's (and Lucent's)
expectations for CLEC sales. He replied "You're off the
mark This week's announcement is part of an ongoing effort to focus
resources on high-growth businesses." He gave us some facts that
suggested how well Nortel was doing, including the IMAS/Promatory DSLAM
internationally. We'll have more next issue, when we know how much is
on the record. But we believe international CLECs will have to cut back
as well, and note that Versatel just decided to hold off on DSL in England
and France. The difficulty in depending on CLEC business was confirmed
by an industry CEO. "Let's face it, the CLECs have failed, and
we need ILEC business," he had emailed a few hours earlier. Neither
he nor we believe, of course, that all CLECs will fail - but we think
it will be very hard to build a Nortel-sized business by concentrating
on CLECs. We now expect less than explosive CLEC growth, but hope Nortel,
and others, prove us wrong.
- Thanks to Mark Peden, who was the first to point out we called the
T1E1.4 committee by the wrong last number.
- We agree with J., who wrote us T1E1.4 committee is the right place
to develop a standard to minimize repeater interference. But
we strongly disagree with J's conclusion the telcos should wait before
beginning testing of repeaters. Between 15% & 30% of the US is not
being served because of a distance problem; SBC is legally committed
to universal service, and that is good business for the other telcos
as well. Telcos have every reason to support research and begin testing,
the sooner the better. If the telcos - 90% + of the likely customers
- don't get involved now, the products may prove uneconomical to develop,
and too risky to invest in.
Briefs:
- Qwest signed a deal with NorthPoint and New Edge to charge
$4.89/month for shared lines.
- Folks at 2Wire, returning jubilant from winning awards at CES,
came back to discover more than two dozen colleagues laid off, presumably
because ISPs are taking their time about actually ordering gateways
from anyone. Brian Hinman says it was a very hard decision, but "Better
to do a layoff with plenty of cash in the bank than wait until you don't
have any." They have $20M on hand.
Products:
- Netopia TER/XL is an add-in security module designed to do
IPSEC and Triple DES at line speed for $399. They also introduced
- General Bandwidth announced the GenView Element Management
System, to control their VoDSL networks.
Chips:
- Broadcom announced the BCM5840, a single chip IPSEC security
processor that can run at 2.4 Gigabit per second. The price of
VPNs is due to come down.
International
- Japan will go to fiber, rather than DSL, according to Sony's
Idei. DSL Prime, despite our name, agrees fiber is the right decision
for an affluent nation, and believes the US telcos are making a mistake
not moving to it faster. But we have strong confirmation that several
hundred thousand lines of DSL equipment are on order in Japan, and suspect
that Japan will also grow rapidly in DSL, at least for several years.
People:
- Mark Emery, from Lucent AGS and Carrier Access, is now SVP
for R&D at CopperCom, and Steve Gaynor is VP for market development.
- Doug Broad moved from Lucent to Celox Networks, where they
are working on an switch designed to handle 6 million simultaneous connections.
- Jef Raskin's "The Humane Interface" went into a revised
3rd printing, and is now available in six languages. Since he left Telocity,
he reports having "more consulting requests than I can take"
and now a column in Forbes ASAP.
Stock Market:
- J.P. Morgan and Salomon Smith Barney were forced to postpone a $2B
Genuity offering, which received unattractive ratings. Backbone
providers have also not been kindly treated by the market - imagine
the Genuity price if PSI is used as a comparable.
Headlines Jan 15, 2000
- Standing ovations at Kennard's last
hurrah
- ADSL works fine at 24,000 feet - with
a repeater
- Share that DSLAM! The Judge says unbundle
- Sue the bankers!
- Casualties: Darwin, Nortel's CLEC strategy,
Bazillion, Motorola CopperGold
- Briefs: Verizon ISP pricing, Covad, Rhythms, Apple's
new DVD writer, Sharegate, 2Wire, Motorola, Copper Mountain, HarvardNet,
Alcatel, Avaya/Paradyne, Telocity, Nokia Norway, Rhythms Canada, France
Telecom, NorthPoint, Esat, Thailand, Michael Gulett, Richard Borbon,
Jack Reily, Phil Anshutz, Redback
“We must bring the benefits of the Digital Age to all
Americans, from the business districts to the barrios; from those with
every advantage to those with disabilities; from the young to the old;
from suburban enclaves to the rural heartland.” Bill
Kennard. Others talk about serving everyone - he worked hard to deliver
it, and will be badly missed.
NorthPoint faced a January 11 deadline for an absolutely essential loan.
Because they released no news, we fear the worst. Say it ain't so, Liz!
We also have confirmed several major DSLAM manufacturers have lowered
their production forecasts for the first half of 2001. In addition, with
chips in good supply, selected customers, especially in Asia, are being
offered much better deals. The industry is still growing rapidly, but
not at the extraordinary pace some expected. We will have more details
when we have on-the-record sources.
Two items from last week require correction. We did not mean to suggest
Efficient had lied to Wall Street, as might be inferred from the way we
wrote an article about five companies that disappointed investors. It
was bad editing and simply a mistake. We may also have had some facts
wrong about Verizon's pricing to ISPs, with a note in briefs below, but
we're waiting for details.
San Jose's SUPERNET this week look to be an interesting show, from the
SUPERCOMM people. We'll miss it, but will attand DSLCon Global in Hawaii
early in February, and visit San Francisco mid February as well. Say hello
to the round fellow with a beard and the irrepressible Jennie Bourne.
DSL works fine at 24,000 feet
Tracy Starnes using Symmetricom
repeaters at Chester Tel
Starnes, Assistant Plant Engineer, lives 24,000
feet away from the nearest connection, an AFC remote terminal, so he took
the opportunity to beta test the new unit. He's getting 3.9M downstream
and 492K up, in a binder with 100 pair and other DSL connections. One
happy user, of course, is not the same thing as a rigorous trial. We're
optimistic the technology will prove out, if not necessary this particular
unit, because Stanford Professor John Cioffi (who invented DMT coding)
and T1E1.3 stalwart Tom Starr both think ADSL repeaters can work. We are
amazed the telcos aren't jumping in to test the equipment; based on our
understanding of the bill of materials, this or 2Wire's similar unit would
be affordable in telco quantities. In many cases, it should avoid the
need for a DLC.
SBC & the FCC can't ignore the Telecommunications
Act
Judge Silberman insists on resale
of DSL
The court says the law is clear: DSL should be subject to the same
rules that require the telcos to share services. Unbundled elements and
resale of telco services are likely new tools for competitors as an Appeals
court orders incumbents to share all facilities - presumably including
DSLAMs - and offer their services at wholesale rates. Judge Silberman
found that separate subsidiaries were not sufficient to bypass the Act.
Rather, the subsidiaries were "successors or assignees" of the
telcos, and regulated.
Nothing's likely to change until after months or years
of appeals and proceedings. Under the law, the FCC can "forebear"
from requiring unbundling, but that would require a finding of public
interest, inherently implausible as a waiver would reduce competition
and presumably raise prices. Telcos will argue they will be inhibited
from investment in broadband if required to share, but that's unsustainable
on the facts. Telcos throughout the world are investing in DSL whether
or not they are given a protected monopoly, because they project DSL will
be profitable as an additional service offered by incumbent carriers.
It's a no-brainer for a telco to do 60-80% DSL coverage.
The FCC cut a deal with SBC to allow the Ameritech
merger to go through. The FCC got a commitment that SBC would provide
broadband to every customer in their territory - a universal service commitment
fulfilling public policy. SBC also promised to compete in thirty markets
across the US, and accepted several other goals. In return, the merger
went through and they got the monopoly they wanted on certain DSL services.
But Silberman called the deal "legal jujitsu", and vacated it.
Judge Silberman is a conservative Republican who appointed
Ken Starr and is unlikely to be over-ruled by the Supremes. His wife's
"Independent Woman's Forum" led the attack on Bill Clinton.
Arch-conservative Richard Mellon Scaife provided $450,000 to fund IWF,
described by the Boston Globe "In the marketplace of ideas, from
the national news media all the way down to local radio, the IWF has shown
its real strength... [The] IWF is well on its way to becoming the foremost
media nemesis of the feminist movement"
Sue the banker!
Log On America goes after Credit
Suisse for $100M
Companies are going broke because they counted on
the next round of funding being there, and the internet takedown has killed
that dream. Entrepreneurs are adults, responsible for their own decisions,
but it is incredibly seductive when the financial experts from Morgan
or Goldman look you in the face and assure you they will be able to raise
hundreds of millions for you. Company after company is failing today,
having expanded too much, and raised too little capital, usually relying
upon assurances from the best and brightest of Wall Street. Many will
be cheering LOA for striking back, even if their chances resemble Don
Quixote's. Rarely do bad judgements on Wall Street give rise to successful
suits, and "malpractice" standards do not apply. Fine print
in contracts protect the investment firm against even the most egregious
mistakes. Fine print doesn't always hold up in consumer cases, but businessmen
raising millions presumably are bound by every clause. LOA has additional
claims of Credit Suisse self-dealing (their subsidiary apparently took
most of the issue), and DSL Prime has not examined the case closely enough
to report on its merits.
But whatever the merits, many are cheering on
the "little guy" against the banks, who always make convenient
targets.
Tears and standing ovations for
Kennard
He cried as staff and reporters
cheered
Bill Kennard is the most extraordinary individual
we've met in telecommunications, with integrity that withstands severe
tests. At a Credit Suisse conference this spring, he followed Nacchio,
Whitacre, and a dozen other very smart CEOs and analytically outclassed
them all. They all looked at the effect of industry trends; he instead
looked at how underlying changes would create new trends. He'll stay in
Washington, in a special program sponsored by the Aspen Institute. His
immediate priority is "to get some rest and spend some time with
my 10-month-old baby who really needs a little bit more of my time."
Reed Hundt, his predecessor, found remarkable opportunities after leaving
office, and we hope the same will be offered to Bill Kennard.
Casualty List:
Darwin: $91M September wasn't enough
to keep them out of Chapter 11
Vulcan Ventures - Paul Allen - was one of the investors
that doubled up their bet on regional DSL provider Darwin, and Pat Mulloy
was promoted to CEO with a turnaround order. They cut more than half the
staff, shed healthcare and kiosk divisions, and focused on basement DSLAMs
and commercial customers. Cisco is owed $15M, and Tut $3M, per Bill Wolfe
of the Louisville Courier-Journal. Elastic Networks had been a major supplier,
but they were not referenced in the news article and UBS reports they
had cut their exposure.
Vendors "CLEC strategy"
is failing, as Nortel's layoffs demonstrate
Joe Roth, Nortel's CEO, replied "We're not
interested in customers who have trouble paying their bills" when
we asked him about troubled CLECs. But beneath the top management level,
his company's main strategy in telephony equipment has been to increase
sales among the CLECs, most of whom are struggling at best. Short of taking
more financing risks (they have $100's of millions at stake in companies
like Log on America and already faced major writeoffs at Prism/Comdisco),
Nortel has no way to meet sales goals through CLECs. Facing that reality
made this week's layoffs almost inevitable. Lucent is in a similar bind,
still aggressively courting CLEC sales with diminishing return and increased
risk, although Lucent's Stinger DSL unit is optimistic about avoiding
the worst.
Bazillion strands 5,000 in Seattle
Saturday, suddenly 5,000 folks found themselves
shut down, in some cases also losing phone service provided as part of
a bundle. Hicks, Muse did not deliver an expected financing round,
and with no money the company suddenly shut down, recommending folks contact
Speakeasy or Covad directly.
Motorola CopperGold Chipset
It was probably the most exciting of the early DSL
chipsets - if they could deliver what they promised. The brochures were
gorgeous, and the specifications excellent. Unfortunately, the final product
was so late they won very few customers, and now are discontinuing development.
Motorola has a separate group that is producing DSL soft modems - maybe
they believe the customer side won't need chips at all. They also cut
2,500 employees today.
Chapter 11 isn't the end
Smart lawyers know that if trouble is inevitable,
filing Chapter 11 as early as possible is usually the right move. But
companies fear the stigma, and go to great lengths to avoid it, typically
wasting the assets that would give them a chance to emerge. The court
and the law tend to strongly favor the debtor, in the hope of allowing
recovery. Debts are frozen, which means payables are deferred while receivables
roll in, giving a quick cash hit. Contracts can be abrogated, such as
colos, network backbone, or obligatory investments. Flashcom, for example,
looks to be winding up its affairs and liquidating; if it had moved earlier
to the 11 filing, with more cash in hand, it would have had six months
or a year to recover.
Jump.net absorbed into Allegiance
They were feisty, leading the price drops amongst
ISPs and being the first to rail against both telcos and CLECs who didn't
live up to service promises. But 15,000 customers are not enough to be
economical in today's climate, so they accepted an offer from national
mega-CLEC Allegiance.
Briefs:
- Pete Castleton of Verizon wrote that ISPs are
actually getting a better deal in the new pricing, and that our report,
and source, were inaccurate. The intent of the new pricing was definitely
an improvement in the ISP deal, he added, and the handful adversely
affected would be assisted. We're sure the facts he's giving us are
accurate, and we suspect the discrepancy is because we're comparing
today's margins against margins offered a year ago, before the merger
and some price changes. We suspect the problems we reported developed
later in the year, but we missed the changes before this article. Errors
help no one, which is why we sent the source article (from the respected
DSL Reports) to Verizon for comment before we wrote.
- Covad still has an ISP problem, with one-third
of lines classified non-revenue, despite the good news of good news
of 274,000 lines in service, (half business and half consumer.) Only
3 percent were sold direct, which explains Covad's latest 400 layoffs
and virtual dismantling of the $200M BlueStar acquisition. 17,000 line
shared lines proved that program is finally moving. But payment problems
now affect 92K lines and 19 ISPs, four of whom filed for bankruptcy.
Because of ongoing disputes with the ISPs, most have not joined the
"Safety Net" program. Until Covad comes to settlements
with the ISP, it's impossible to calculate the ultimate fiscal effect,
or whether even larger provisions will be needed.
- Rhythms in Massachusetts won the right to place
line cards in Verizon DLCs, split lines with others besides Verizon
(if the customer, for example, buys local service from AT&T), and
have lines conditioned without charge.
- Demand for bandwidth will probably be stimulated as
more users have the practical means to store videos. A step towards
that future came with Apple's new DVD writer, included in the
top line model and available for less expensive units. David Pogue reports
Compaq is the next customer for the Panasonic built DVD writer. More
backbone, anyone?
- Pleasanton, in the East Bay, is the home of Sharegate's
new California office.
- CES “Best of Show” for Home Data Networking went to
2Wire, showing their new 802.11b wireless gateway. 2Wire has inspired
the industry with the promised extra video and commerce features of
their box. Cayman has shipped more units, however, and folks like Sharegate
and Broadband Gateways are also close to market. Thompson, Sony, Panasonic,
and Motorola have products coming as well. The result is prices coming
down (including a large drop from 2Wire.)
- Some HarvardNet customers were left stranded
when Verizon cut off the lines before the date HarvardNet had reported
to customers.
- DSL.net is looking to rapidly build its customer
base, buying some from Exario (which is focusing on large VPNs instead)
and participating in Covad's SafetyNet.
Products:
- Copper Mountain dramatically extended the possibilities
of their DSLAMs with the 12 port CopperEdge T1 Line Card, designed to
enable service beyond SDSL limits. List price is $9,995.
- Motorola's StreamMaster 5000 set top box was
another hit in LasVegas. Enron/Blockbuster is using it for the Video
on Demand trials in New York and the West Coast. The trials are small,
but the partners (Verizon, SBC, Covad among them) have the potential
for a massive deployment after the kinks work out. Missing, however,
are most movies; Blockbuster hasn't been able yet to persuade Paramount
to join in widely, although they are both parts of Paramount. The music
folks are supporting Napster, now - Divx and other compression will
make movies easy to copy as well, and it's time for the studios to get
their heads out of the sand.
Deals
- Alcatel continues to win new business from Telus
& BellCanada, who have installed over 200,000 lines of DSL.
- DSL, contrary to previous assertions, needs security,
and not just a casual warning on the web page. SBC has made a deal to
distribute McAfee software, while Sprint is selling Norton. Telocity
instead uses the Nortel/Shasta central system to provide a firewall,
and charges users an extra $10 for bundle with security and home networking.
- Avaya told us they entered a new partnership
with Paradyne after a careful evaluation found the GranDSLAM particularly
easy to install and manage.
- Telocity first intrigued us because their plans
were to be much more than "yet another ISP", planning a home
connection with advanced video and networking features, plans deferred
as they built the ISP. They just announced a visionary move, working
with Inari on a home network over AC power lines. Sprint also sees home
networks as a crucial part of the service, delivering a HomePNA system
today and announcing a wireless one for the near future.
International
- Nokia won the DSLAM contract from Telenor of
Norway.
- Rhythms Canada has DSLAMs in 127 central offices,
with 1,300 subscribers in Toronto, Montreal, Ottawa and Hamilton.
- France Telecom's Wanadoo began an aggressive
new sales campaign.
- Bilsa began video over DSL trials in Ankara,
Turkey, with mPhase equipment.
- NorthPoint, short of cash, sold its half of
a Canadian joint venture to partner Call-Net for $5.3 (U.S.). Liz Fetter
was very clear about the cause of the sale. “Verizon dealt us a crippling
blow when it unexpectedly terminated our binding merger agreement six
weeks ago, which we believe was a breach of Verizon’s agreements with
NorthPoint." Our analysis of the suit last week was that no one
could be certain until the jury came back, but each step like this raises
Verizon risk of consequential damages. On the other hand, we have no
signs whatsoever that Verizon is seeking to settle, or that NorthPoint
can hold out long enough for the case to come to trial.
- Esat, Irish Independent, is testing DSL with
the hope of offering service starting in April. Incumbent Eircom is
one of the last of the EC companies to unbundle, and rates for competitors
are generally prohibitive,
- Lenso DataCom and United Broadband Technology are now
serving hundreds of customers in Thailand.
People:
- Michael Gulett, president and COO, has left
Virata. The announcement gave no details on his new position, nor did
it include the usual gracious statement from someone leaving "to
pursue other career opportunities".
- Richard Borbon, was the IDSL product manager
and helped launch NorthPoint IDSL in all LEC territories, seeing the
IDSL business grow from 3% of total lines to about 25%. Now he's the
Product Manager, Broadband for PCTEL. He's working on the host signal
processor-based (software) V.90/ADSL combo PCI card, and hopes the soft
modem allows bundled DSL to become standard equipment on new PCs.
- Jack Reily joined Efficient as EVP, corporate
development, and Clyde Musgrave As CTO as Bruce Brown builds his team.
- Phil Anshutz, controlling Qwest stockholder,
just bought most of the debt of Regal Cinemas, and looks to take control.
Qwest is the most logical buyer of a DLEC, because they intend to build
a $3B national CLEC and have the best use of the equipment and colos.
Joe Nacchio agreed with this conclusion, but replied "the price
can go even lower" when we asked if they would buy Rhythms, Covad,
or NorthPoint. He (and others) are presumably looking at such a cutrate
deal, paying off the bondholders in part and the stockholders minimally.
A deal like that (including a chapter 11 filing) is the most plausible
result if a big DLEC runs out of cash, but we cannot confirm NorthPoint
is about to announce such a deal, as rumored.
Stock Market:
- Solomon Smith Barney pointed to Rhythms and
Teligent as potential problems for the banks owed money.
- January 10 CIBC downgraded Redback, and
the same day Robbie Stephens raised their rating. We're glad not to
have make a call, because Redback's future depends on the success of
the new optical equipment, just starting to ship, and we have no idea
how to value a new product in a new market. The current subscriber management
units have been remarkably widely accepted, but subscriber management
is becoming a feature of other network equipment.
- UBS Warburg lowered estimates for Cisco, ADC, and Nortel
telecom sales, confirming our conclusion at top that DSLAM sales growth
has slowed, although we do not have information on the same companies.
In the works: "Deregulation is a colossal and dangerous failure"
Gov Gray Davis of California, as lights go out in Silicon Valley. Will
this prove true in telecom as it has in electricity? **
We welcome contributions to the article "100 words of advice to the
FCC". ** The next Voice over DSL News is well along (coming 1/27),
with an delightfully clear piece on channelized voice from Jim Sackman of
AFC at http://www.vodslnews.com/a/Sackmanchannelized.html.
From Judge Silberman:
251(c)(4), requires ILECs "to offer for resale at wholesale rates any
telecommunications service that the carrier provides at retail to subscribers."
Section 251(c) also requires ILECs to negotiate in good faith, to provide
inter- connection with other telecommunications carriers, to provide unbundled
access to network elements where technologically feasible, and to allow
physical collocation of equipment necessary. The Act defines "advanced
services," regardless of transmission medium or technology, "as
high-speed, switched, broadband telecommunications capability that enables
users to originate and receive high-quality voice, data, graphics, and video
telecommunications using any technology." DSL is clearly included.
It did not limit the regulation of telecommunications services to those
services that rely on the local loop. For that reason the Commission may
not permit an ILEC to avoid s 251(c) obligations as applied to advanced
services by setting up a wholly owned affiliate to offer those services.
Whether one concludes that the Commission has actually forborne or whether
its interpretation of "successor or assign" is unreasonable, the
conclusion is the same: The Com- mission's interpretation of the Act's structure
is unreasonable. * * * * The order of the Federal Communications Commission
is vacated.
AT&T emphasizes that the affiliate markets the same category of services
to the same body of potential customers as did SBC/Ameritech.
The Commission is thus using the successor and assign limitation as a form
of legal jujitsu to justify its relaxation of s 251(c)'s restrictions.
Complete text at http://laws.lp.findlaw.com/dc/991441a.html
Headlines Jan 5, 2000
- SBC's 200 COs in BellSouth and US West
- Soft modem at Vegas interoperability
demo
- Who makes money as products become
commodities?
- Investor Relations 101 - Don't lie
to Wall Street
- Verizon price increase to batter ISPs
- @Link's big Winstar deal
- Briefs: Earthlink, Broadcom, Alcatel and ADI chip leaders,
Agere/Lucent Microelectronics Linux, LSI Logic/Datapath, Billy Tauzin,
Mike Powell, Blair Levin, T. Curtis Holmes, Next Level Denver, Everest
Broadband 50M, SBC/Prodigy
"NorthPoint is on the brink of disaster in a life-or-death situation.''
Barry Sullivan, NorthPoint's attorney, reported by Bloomberg
NorthPoint decision time is at hand. Cash on hand will run
out within weeks. Between Friday and Wednesday NorthPoint will either
receive $160M from a temporarily blocked credit line with Goldman Sachs,
CIBC, CSFB and a consortium of lenders or face imminent Chap 11. NorthPoint
is supplying weekly cash numbers to the banks and paying $575,000 for
Ernest & Young and Shearman & Sterling to document to Goldman
that the terms of the line of credit have been met, and the funds must
be released. Copper Mountain this morning lowered income, because of fear
of NorthPoint non-payment. The Verizon lawsuit is still arguing jurisdiction,
and unlikely to help in time.
Meanwhile, NorthPoint is spending more money on T-3's
and other network expenses than they are receiving in revenue. They could
drop virtually the entire headquarters, eliminate interest payments and
still be cash-negative for the year. The business must get cash.
We hope they make it: honorable outfit, and the longterm fundamentals
remain attractive.
SBC's 200 COs in BellSouth and US West
What will they do with NAS COs?
NAS is worth a fraction of SBC's $150M investment,
so they just received 200 COs as a sweetener for converting into near
worthless stock. Most of these are in major business markets - NAS planned
500 COs in 2001 in cities including Atlanta, Miami, Memphis, Louisville,
New Orleans, Seattle, Phoenix, and Denver. Whitacre convincingly asserted
this Spring that SBC intended real nationwide deployment, not just
a minimal satisfaction of Ameritech merger requirements, but they've done
virtually nothing before now. NAS was promised SBC business in Verizon
territory, where they have 500 operational COs but fewer than 10,000 customers.
Officially, SBC can tell us nothing about plans for the spaces "all
we're saying now is that we are still determining how best to use them".
SBC general policy is to tell the press as little as possible for a public
company. The pr people are cordial, but we wonder about a corporate strategy
that amounts to making press coverage as difficult as possible.
Soft modem at Vegas interoperability
demo
DSL Forum proves everyone can work
together
70% of modems in new computers are primarily "soft
modems", using the system processor rather than a dedicated DSL chip.
That's clearly the future - 5 or 7 years from now, DSL modems will probably
be built in and minimal hardware. Motorola is bringing that closer, with
a sample unit that passed interoperability testing at the University of
New Hampshire and is included in the DSL Forum CES demonstration. Standards
this time are higher than at SUPERCOMM in June, with more extensive testing,
but the results are the same - the equipment works together, and the show
demo is truly impressive. Also big at the show will be home gateways (2Wire
is showing wireless and voice, Motorola the set top box used by Enron/Blockbuster
for VOD, and way more we'll report next week as the show announcements
come in.
Who makes money as products become
commodities?
Soft modems will reduce the DSL chip market substantially
in several years (PC Tel is also close), but we believe the key business
issue in 2001 will be competitive pressure dominates. A worldwide chip
shortage held back supply, but UMC now takes big ads in EET promising
fab capacity now. So margins will predictably erode as prices come down,
while every vendor who doesn't want to sell at rock-bottom prices needs
to differentiate. There are differences in reach in chips and modems,
which increases the number of customers served, and of course some vendors
give better support and prove more reliable. But everyone is struggling
up the food chain to gateways, voice, integrated functions, and the like,
as the prices of ordinary equipment are likely to plummet. Great for the
consumer and DSL provider, allowing an increase in volume. It's too early
to predict whether larger sales will make up for slimmer margins.
Investor Relations 101 - Don't lie
to Wall Street
Even the best of analysts (and journalists) are
highly dependent on management's projections, although we try to watch
customers, suppliers and the industry as well. Journalists rarely lose
their job for poor forecasts, but analysts do. Anything that makes them
doubt management's full disclosure scares them, and hurts the company
more than the bad news itself. Carrier Access shot themselves in the foot
even more dramatically, releasing bad news 8 p.m. Friday before the holiday.
One top analyst downgraded them heavily, assuming if they were burying
news, there was even more to hide. BellSouth and SBC took hits a few weeks
ago around their lowered projections because the explanations when implausible.
(Increasing DSL shouldn't cost BellSouth that much, while being behind
in Ameritech region construction is a typical ordinary problem, not a
special one-time item.) The result: much of the street is coming to believe,
as we do, that telco earning growth in the teens is unlikely, and management
will have more shortfalls to explain.
Verizon price increase to batter
ISPs
GTE outsold BellAtlantic because
of ISP ties
Verizon will impose an increase systemwide on ISP
charges, which will be especially acute in GTE territory. Two-thirds of
GTE's subscribers had come from outside ISPs, a key reason GTE had twice
as many DSL customers as the much larger Bell Atlantic, whose efforts
were 70% short in 1999 and 30-40% short in 2000. The new prices will be
as high as $35 for a service that Verizon sells itself, including ISP
charges, for $40, according to DSL Reports. Like Bell Atlantic's previous
pricing, it favors Verizon's data subsidiary and AOL, while effectively
putting out of business most of the competition. The margins provided
their data sub are twice that offered the average ISP - an effective way
to promise open access in DC but not deliver it. We are disappointed that
FCC leaders, well aware of the situation, have chosen to fight other battles.
@Link's big Winstar deal
Telco quality ATM backbone wins
big voice deal
"We're now fully funded through 2001" a happy Monish
Kundra reports, as Winstar's Bill Rouhana wrote us " VPN capabilities
will help us lower our costs in serving off-net customers and focus more
on driving on-net business. @Link is a well-funded new player with a management
team that understands the local communications marketplace. " Alex
Good, once senior at Bell Atlantic, leads that team. They've built heavily
in Ameritech, with ambitions beyond, but like so many have had to cut
back in the last few months. Winstar has recently raised the better part
of $B, as Credit Suisse doubled up its investment and Microsoft came along,
and looks to save money buying long term capacity, creating a virtual
IRU with attractive asset accounting.
Winstar did a through investigation of deliverable
VoDSL, and told us that reliability was critical to them. We've been wondering
since the spring "what ever happened to VoDSL", as none of the
big players have moved in; a vote of confidence from Winstar would have
been a strong endorsement. We hear rumors that the VoDSL equipment itself
is proving out well in the field, but the DLEC networks are not sufficiently
robust, but have not been able to confirm that.
Briefs:
- Kudos to Mike Lunsford of Earthlink, who gave
a straightforward and honest answer when the Contra Costa Times inquired
about local service problems. "It's a funky problem that we have
our hands around, and the problem is in its death throes," Lunsford
said. "We almost have it whipped. We will find a way to reimburse
all of the customers who have been affected. This is entirely on Earthlink's
shoulders." Customers prefer honesty, we believe, not the typical
deceit and fingerpointing typical of service problems. We've personally
recommended Earthlink, not least because our own service has gone done
once in six months - when a telco tech cut the line. Netopia, Earthlink,
and Covad have proven rock solid for us.
Competition:
- Broadcom Corp introduced for CES a single-chip
digital set-top box. Their purchase of E-14 will help them move from
cable to DSL, and many of their large cable box customers have been
eyeing the DSL market.
Chips:
- Year end DSL chip sales will show Alcatel with
a major lead, and ADI is probably second. Globespan is the largest
of the independents, and the most visible.
- Linux support in home gateways is the latest offering
from Agere/Lucent Microelectronics. Ucentric Systems of Massachusetts
is the first customer announced.
- LSI Logic/Datapath introduced a combined analog
front end/line driver that operates at 5 volts and has very low noise.
It's 14 bit linear and -160 dbm, excellent performance for the $12-14
price quoted. But we are very skeptical of LSI's claim this will increase
servable homes by 30%, because other sources of noise in most environments
are more significant. We'll wait for field results, although we predict
a 10-20% total increase in reach from multiple technologies.
People:
- Billy Tauzin took the Chair of the House Commerce
Committee, with particular close ties to BellSouth and other telcos.
The New York Times reported he "raised millions of dollars and
threw lavish parties at the Republican National Convention" to
get the job. The end of reciprocal compensation is step one, and bills
to eliminate FCC review of long distance are likely from the committee.
- Mike Powell received support from John McCain,
chair of the Senate committee that would confirm him if he chooses to
take the FCC chairmanship.
- Blair Levin, former FCC chief of staff, joined
Legg Mason, who have a strong telecom analysis group.
- T. Curtis Holmes from Lucent takes over as COO
of Metasolv.
Stock Market:
- Where and how will Motorola recognize its $6B loss
on Next Level stock , or SBC its several hundred million on its investment?
Presumably, buried on the balance sheet - but in Moto's case, that's
enormous in proportion to reported earnings.
- Next Level surprised with lower sales and a
writedown of inventory, but UBS Warburg reports Qwest is installing
VDSL in parts of Denver, and we've previously reported Qwest's Nacchio
comment that he expects to move heavily in VDSL when Motorola delivers
the next generation of equipment in mid-year.
- Everest Broadband, a New Jersey BLEC, raised
$50M from Philly utility Exelon, Pequot Capital and Softbank. They are
looking to buy competitors.
- SBC added three captive board members at Prodigy,
and provided a $100M line of credit. SBC now has a consumer deal with
Prodigy, separate business deals with NAS and Covad ($600M), and 200
of their own COs out of district.
Dec 29, 2000
What if NorthPoint beats Verizon?
Covad, NTT ready for Japanese breakthrus
British Telecom/Teradyne: testing adds customers
VersaPoint deal killed by NorthPoint's $ woes
"Covad will face a class action suit"
Old FCC blocks Verizon LD in Mass for competition
Casualty list - some fatal
-
JATO "We are terminating service in
all locations shortly
- Westell warns on sales
- ECI cutting 300 as IPOs flounder
- Picus: Nokia financed the equipment, but no
one paid for operations
- Digital Broadband drops 450 people
- Maverix.net, DSL.net, Merrill Lynch, Intel
Telocity/Hughes to become giant DSL ISP
Inadequate service costs Telia 3G wireless license
The AOL settlement - an editorial
-
Make history by opening
access to content
- Prevent discriminatory pricing locking
out competitors
Briefs: Rhythms, Verizon, longrun telco financial crunch,
consumer DSL needs volume, Ameritech slowdown, Covad's cheap business
service, Symmetricom testing, BellSouth & Sprint fiber going home,
Nebraska Central Telephone, Westell's modem is a mini-router, iMagicTV/Advanced
Fibre, Alcatel 7300, Jetstream/Pine Tree, Accelerated/Siemens/Winstar,
Paradyne/Sierra Telephone, MegaPath/Telocity, Iceland, Telecom Italia,
France Telecom, RCN cutting, AT&T $2B loss on @Home, Tioga, line
driver power coming down, Proxim/Virata HomeRF. Chartered Semiconductor,
Ron Cates, Mike Borsetti, Mark Housman, Dave Farber, ITXC, analyst's
clash on telco prospects, Ciena/Cyras and Redback's challenges, Hawley's
Gluon, VoDSL in New York, Netopia's cash trove
Subscribe your colleagues - just reply to this
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It's free.
"Poof! Smart investment ideas go up in smoke, as
market tumbles. Uncontrollable, indefatigable, unreasonable, outlandish
exuberance" Wall Street Journal
Enjoy your holidays, and sorry for an issue that's
long even after we dropped the ads at the end. We've been on hold, confirming
the facts on Verizon/NorthPoint.
Verizon, late November, was facing a $400M loss if they
completed the NorthPoint deal - and a contract that did not give them
a clear way out. DSL Prime believes they gambled that a weakened NorthPoint
could not defeat them in court - or at least that the case would drag
on for years without affecting them directly. But if the jury believes
they wiggled improperly, the sky's the limit on damages. (Long article
at end).
DSL subs in the US will end 2000 at 2.2 or 2.3 million. Korea will be
way 1.5M, and the rest of the world is racing to catch up in 2001. That's
400% growth this year, and it will more than double in 2001. DSL remains
a great industry and great place to work, despite financial problems.
SBC's $20B market drop last week dwarves even a $B judgment. DSL delays
were a small part of the explanation. We could pretend to be prophets,
having four days earlier told a NY Times reporter about the underlying
pressure on telco finances, but that was just a coincidence. We've amplified
below our August analysis, that telephony is a slow growth business and
aspiring to double-digit returns cracks the system.
A correction: Rhythms deferred paying a dividend, it did not default.
Karen Breen's letter below.
Covad, NTT ready for Japanese
breakthrus
41% Covad owned ACCA key NTT partner
"Our Japanese customers are ordering like mad!" Laurie
Falconer of Centillium writes. (They have the first chips appoved for
Japan's "Annex C" standards, designed to minimize ISDN interference.)
Few homes are lit so far, but competition is getting fierce enough that
NTT just dropped prices 20% for DSL. They also been ordered to reduce
charges 20% for lines to competitors, and line share costs almost in half
to $3 or less. Sumitomo has a new DSLAM, Xpeed is selling modems to eAccess,
Siemens is delivering DSLAMs to Right Access in Tokyo, and Sony is leading
All Planning, a $300M webcaster. The fewer than 10,000 customers at the
beginning of 2001 will be hundreds of thousand by yearend - possibly more.
Prices are settling at Yen 5,000-7,000, about 20% more than the US, but
a great bargain compared to former ISDN rates. (10 million subscribe to
ISDN, whose rates are dropping dramatically.)
Tokyo Metallic and eAccess have ambitious plans to install DSLAMs, but
the volume leader undoubtedly will be telco NTT, which sells DSL to retail
customers through NTT Communications. NTT Communications will offer one
plan reselling NTT East and West DSL services, but in most major cities
will emphasize a slightly cheaper plan from ACCA, owned 41% by NTT and
41% by Covad, which is supplying operations support. Along with hundreds
of thousands of customers, that affiliation connects Covad with NTT, which
invested $5.5B to buy Verio to expand its US base. Affiliate NTT Docomo
is also a major AT&T investor.
Teradyne: testing adds
customers
13% more customers, 20% fewer problems
British Telecom has ordered $6M of Teradyne test equipment after
a large trial proved testing saves money. It also prevents angry customers,
saves reputations, and is essential for mass deployment. The best way
to solve the "DSL Hell" image problem is to reduce installation
difficulties, and testing the lines to prevent problems is a key step.
Teradyne's Celerity works from the CO, and is one of a new generation
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